PurchasePro ready to climb?

CarlCorry

LAS VEGAS (CBS.MW) -- Even though his company's stock has been pummeled more than many in the beleaguered Internet business-to-business sector, PurchasePro.com Chairman and CEO Charles Johnson isn't worried.

Unlike the many Net firms that have cut staff or gone out of business in recent months, Johnson says his company has kept costs low and pushed ahead on a unconventional path that will lead to a profitable fourth quarter.

As a provider of online marketplaces, PurchasePro.com
PPRO, -1.05%
smashed September quarter estimates and has acquired a solid cast of partners to help ramp up sales. Subscribers to the company's marketplaces can buy and sell a wide range of products and services over the Internet.

PurchasePro.com shares have been pounded down 64 percent since mid-October. They were hovering around $16 as late last week.

In that same period, Merrill Lynch's B2B Holdrs
BHH
slumped about 47 percent.

On Monday, the company's shares rose 21.7 percent to $23.75.

Johnson acknowledges "there are still a lot of doubting Thomas's" about the company and it management team, which are reflected in its stock price. But he says those concerns are overblown.

Sands Brothers analyst Gavin Mlinar, who rates the stock as a "strong buy," says the company is "misunderstood."

Unlike other major Internet business-to-business players like Ariba
ARBA
I2 Technologies
ITWO
or Commerce One
CMRC
the company is not going after huge corporate clients and isn't focused on building Internet infrastructure.

Rather, it is targeting its e-marketplaces to small- to mid-sized businesses through partnerships with AOL
AOL
Sun Microsystems
SUNW, +3.92%
and Computer Associates
CA, -0.33%

Mlinar says the market has recognized the value of streamlining buying and selling through e-marketplace technology, "it's just not sure of the appropriate direction right now." And PurchasePro's model isn't winning out right now.

Questions about Q3 numbers

Questions about the company's third-quarter numbers have also plagued the firm's stock.

PurchasePro reported a net loss of 7 cents a share on $17.3 million in revenue for the third quarter, 10 cents a share better than analysts' expectations, according to the First Call consensus estimate.

However, short sellers, who benefit from falling stock prices, jumped on questions about a big jump in the company's accounts receivables, a flat recurring revenue line and doubts about whether $5.3 million in third quarter deferred revenue would be realized in the fourth quarter, as expected.

Prudential Securities analyst Timothy Getz said in a note to clients in November that that PurchasePro may not be able to recognize all of that revenue this quarter. The company may still end up reporting $2 million in deferred revenue for the December quarter.

The issue stems from reselling agreements PurchasePro entered into reselling agreements with several companies, including America Online
AOL
and Sun Microsystems
SUNW, +3.92%
The company sold 27 licenses for its e-marketplace software to those resellers for a total of $5.3 million, but none of that can be recognized until customers buy the product.

It seems there's a risk that the revenue from some of the 10 licenses sold to Sun Microsystems make not come in on time, analysts said.

Johnson says the issue has been overblown.

"It's not even an issue. We are not going to have any deferred revenue in the fourth quarter," he said, adding that investors use that as an excuse to short the stock.

And whether or not the other $2 million comes along in the fourth quarter won't have any impact on the company meeting revenue projections of $30 million to $32 million and turning a profit, Johnson said.

The need for top-notch management

Analysts say the company stock has also been discounted because its initial top management team isn't Ivy League-bred and don't have Fortune 500 experience like other leading Internet B2B players.

Johnson, a Kentucky native who built a collection of profitable companies with a combined headcount of about 1,200 before starting up PurchasePro in 1996 to "capitalize on the efficiencies of the Internet," says the company is working hard to quell concerns about PurchasePro's leadership team.

The company made a key hire last week in the form of Shawn McGhee, who has taken over day-to-day operations of the company as chief operating officer.

McGhee, 37, was previously president of Office Depot's
ODP, +1.33%
North American operations. Office Depot is one of PurchasePro's biggest clients.

Now, analysts say, the company has to reel in a top-notch chief financial officer to address issues around investor relations, financial management and the presentation of the PurchasePro story and business model to Wall Street.

Johnson said he's "aggressively interviewing" for the position, noting that current CFO James Clough, a former attorney for Pillsbury, came into the job knowing that he would eventually be replaced. "We are looking for the crème de la crème of CFOs," Johnson said.

On Monday, the company appointed Scott Wiegand as vice president and associate general counsel. Prior to joining PurchasePro, Wiegand, a Cornell Law School graduate, practiced law at Dinsmore & Shohl in Cincinnati.

Viva Las Vegas

Investors are also uncertain about any Net firm that chooses to set up shop in the desert surroundings of Las Vegas rather than in a dot-com hotbed like California's Silicon Valley.

But Mlinar, of Sands Brothers, says the decision to stay in Las Vegas has paid off for PurchasePro, which has built strong relationships with local casinos and hotels.

"They have established themselves very well in the hotel and hospitality industry ... they have a lot of that market," he said.

To solidify it position in that market, PurchasePro announced in late October that it would acquire Stratton Warren, an industry procurement specialist whose customer list includes Opryland, the MGM Mirage, and the Mandalay Bay Group Resort.

Following that announcement, PurchasePro snagged a deal to develop an e-marketplace connecting MGM Mirage's 18 casino properties to more than 30,000 businesses worldwide.

Powerful partnerships

What makes analysts excited about the company is its partnerships with some of the biggest players in Netdom, most of which will be in full swing in the first quarter of 2001.

PurchasePro.com is the B2B platform and B2B strategy for companies such as AOL, Gateway
GTW
Computer Associates, Sprint
PCS
and Office Depot, which have invested capital through advertising contracts and entered into revenue sharing agreements with the company.

PurchasePro.com will recognize the first $100 million in revenue through its joint e-marketplace with AOL and split revenue 50-50 after that. More than 100,000 businesses have signed up to become members of the co-branded marketplace.

Gateway has begun to place PurchasePro icons on its desktop for small- to mid-sized business customers and plans on training over 70,000 customers per year on the use and benefits of e-procurement.

In addition, Purchase and CA are training over 3,000 CA sales reps on PurchasePro products. CA reps are being offered a $25,000 commission every time they sell a marketplace, which should give them ample incentive to go out and sell.

Analysts point out that by having other firms sell its products for them, PurchasePro avoids having pour truckloads of cash in to sales and marketing coffers.

Getz, of Prudential Securities, says the big incentive for companies to enter into PurchasePro marketplaces is that they not only get access to their suppliers, but the suppliers of other companies in the network.

What these agreements will add up to next year will be a company that makes bigger profit than virtually any other B2B firm. Getz expects PurchasePro to earn a profit of about $20 million in 2001.

And that, Johnson says, is something everyone should be able to understand.

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